Chapter 6 notes

[rlsrachaellouisesmith]

Hi

In Chapter 6 it states on page 4:
this will include activity to stabilise rates (when cashflows between the government and private sectors would otherwise impinge on bank liquidity).
What does this mean? Can you give an example of when this has happened in 'recent' years.

Also on page 8 it states:
Financial intermediaries sell their own liabilities to raise funds that are used to purchase the liabilities of other corporations.
Is this just saying that intermediaries set up funds for individuals to invest in (which are then liabilities of the intermediary) and they use funds raised to invest in 'borrowing' by corporates/govts (these are the liabilities of the corporates/govts)?

Thank you,
Rachael

 

[Colin McKee]

There are days when a government will bring in more in tax than it spends. This will drain the banking sector of funds and potentially lead to a shortage of cash. there are likewise days when public sector salaries are paid and the banking sector will be awash with cash. The central bank steps in to even out the flows.

For your second question, the best example I can think of is the bit of ActEd text:
Consider the example of a bank. When an investor deposits funds with the bank, a liability is created on the bank’s balance sheet. The bank may then use the deposit to give a loan to another party. This creates an asset (a debtor) on the bank’s balance sheet.